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The Lithuanian Economy

Monthly newsletter from Swedbank’s Economic Research Department


by Ieva Vyšniauskaitė No. 01 • 2010 05 18

The bottom of the recession may have been reached in the


1st quarter of 2010
 After two periods of expansion on a quarterly basis, Lithuanian GDP fell by 4.1% quarter on
quarter (2.9% year on year) during the 1st quarter of 2010, according to the first statistics
estimate. The contraction of GDP was to be expected because the economy was affected
by several adverse factors, such as the shutdown of the Ignalina nuclear power plant and
increases in oil and other commodity prices in the world markets. The recovery in exports
was not large enough to compensate for the persisting contraction in domestic demand.
 We remain cautiously optimistic and expect economic growth on a quarterly basis to
become positive starting the 2nd quarter of 2010. Most recent business surveys point to a
slow revival in activity. Consumer confidence has also gradually become less negative, and
the housing sector is showing signs of stabilisation.
 The forecasted upturn during the 2nd quarter will be led by the export-oriented
manufacturing sector, but domestic sectors will also show somewhat better results. The
economic downturn affected individual manufacturing sectors unevenly, and their recovery
will vary as well. Given 1st quarter results, we are becoming more optimistic regarding the
recovery of production volumes of, among others, rubber and plastics, wood, and paper
products.

Recovery of exports did not offset the GDP growth, quarter-on-quarter


continuing contraction in domestic demand in
the 1st quarter of this year
4

The slow recovery of the Lithuanian economy


observed in the second half of 2009 failed to 0
continue this year. While the Lithuanian economy 2004 2005 2006 2007 2008 2009 2010
recorded positive quarterly growth rates in the 3rd -4
and last quarters of 2009, in the 1st quarter of 2010
Lithuanian GDP fell by 4.1% on a quarter-on-
quarter basis (2.9% year on year), according to the -8

first statistics estimate.


-12
The largest decrease in the value added was
observed in the construction sector as the real
estate market continued to stagnate. The change in -16

the value added created by the agricultural sector


was close to the decrease in the value added of the Even though the 1st quarter GDP results cannot
whole economy, while the industrial sector recorded necessarily be regarded as good news, they were
the smallest decline in the value added. The decline slightly better than we forecasted. The GDP decline
in the value added was somewhat absorbed by in the 1st quarter was expected, given the following
positive changes in the indicators of transport and adverse factors that played a part in economic
storage enterprises. developments during that period.

Economic Research Department. Swedbank AB. SE-105 34 Stockholm. Phone +46-8-5859 1000
E-mail: ek.sekr@swedbank.com www.swedbank.com
Legally responsible publisher: Cecilia Hermansson, 08-5859 1588.
Lina Vrubliauskienė +370 5 268 4275. Ieva Vyšniauskaitė +370 5 268 4156.
The Lithuanian Economy

Economic Research Department, Swedbank


01 • 2010 05 18

First, despite an improvement in confidence, several months: industry, retail, and services
household consumption remained anaemic due to sentiments have been generally on an upward trend
falling wages, poor employment prospects, and an since the last quarter of 2009. Consumer sentiment
omnipresent cautiousness regarding spending. has also been improving since November 2009.
Even though the share of electricity in the
consumption basket is quite small, a 30% increase Consumer confidence indicator
in electricity tariffs for household consumers due to 20 120
the decommissioning of the Ignalina nuclear power
plant exerted a further significant negative shock to 0
80
household spending. Second, although there were
40
some first signs of stabilization in the real estate -20
market (visible in the somewhat increased activity 0
and the slowdown in the decline of residential real -40
estate prices; over March 2010, prices in the capital -40
of Vilnius increased by 3.3% on a monthly basis),
-60 -80
the real estate market continued to stagnate. Real 2008 2009 2010
output in the construction sector declined by 43% Consumer confidence indicator (l.s)
during 2009, and contracted further by 40.8% year General economic situation over next 12 months (l.s)
on year in the 1st quarter. Investment activity Unemployment expectations over 12 months (r.s)
Financial situation of households over next 12 months (l.s)
overall is likely to have kept on falling, given the Savings over next 12 months (l.s)
still-high spare capacity, high risk estimates, and
uncertainty about domestic and external demand
developments. Data on Lithuania’s large export-oriented industrial
sector lead us to forecast somewhat better
Finally, companies were subject to yet another set developments starting in the 2nd quarter. The year–
of challenges in the beginning of the year because on–year contraction of industrial production has
of the rise in costs driven by the increases in also been slowing since May 2009, while, over the
commodity prices. An increase in gas prices in 1st quarter of 2010, industrial production contracted
world markets, for instance, affected the by 4% compared to the same period a year ago1,
manufacturing of chemicals and chemical products. which is a much smaller decline than during the last
The rise in electricity prices for companies due to quarter of 2009. Over March, industrial production
the Ignalina nuclear plant shutdown had an impact rose by 1% year on year (the first increase in
on activities in the construction, paper, wood, and annual terms since October 2008)
textile sectors. The share of electricity in total cost
structure in these sectors in some cases could Manufacturing activity results might not be
reach about 10%. It will take more time for spectacular as of yet, given the reliance of the
companies to adjust to the increase in costs and/or sector on the performance of the Orlen Lietuva
to pass through these cost increases to customers (previously Mazeikiu Nafta) oil refinery. The closing
because the recovery in domestic demand is down of this refinery for repairs for approximately a
several months away and the revival in external month in the beginning of the year was one of the
demand still insufficient. main factors behind the fall of manufacturing activity
by 6.4% year on year over the 1st quarter of 2010.
Another setback is highly unlikely this year… Manufacturing activity excluding refined mineral
products, meanwhile, rose by 1% over the 1st
Even though some of the aforementioned adverse quarter compared with the same period a year ago,
factors will continue to be felt over the year to some and, over March, increased by 16% month on
extent, the 2nd quarter will bring more favourable month and 5.3% year on year.
developments. We are of the opinion that the
bottom of the economy has been reached; We forecast industrial production to still contract
however, we remain cautious and expect a slow overall this year, and some ad hoc movements are
recovery going forward. Quarter-on-quarter GDP possible, given the uncertainties regarding domestic
rates are likely to be positive starting in the 2nd recovery and mixed signals coming from the main
quarter, while, on an annual basis, quarterly GDP trade partners. The improvement in industrial
growth might be negative for some time.

There is no reason, however, to forecast another 1


None of the industrial production indicators in this and
setback of a large magnitude this year. Leading the following paragraphs are seasonally or working-day
indicators have pointed to a revival in activity for adjusted.

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The Lithuanian Economy

Economic Research Department, Swedbank


01 • 2010 05 18

production results, however, is unlikely to face Manufacturing production volumes improving,


material impediments this year. though individual sector developments uneven

Lithuania’s industry, year-on-year The economic downturn affected manufacturing


20% sectors unevenly; however, hardly any sector
started this year without a scratch. Whereas
10% companies expect to break even or show a profit at
the end of this year, the majority of them consider
0% 2009 a lost cause and are content to have survived.

-10% Industrial production, year-on-year

Paper
-20% Rubber, plastics
Chemicals
-30% Optical instruments
2006 2007 2008 2009 2010 Wood
Industrial production Textile
Manufacturing (refined petroleum products excluded) Beverages
Food
Furniture
Industrial confidence indicator Manufacturing
Metals
40 Machinery repairs
Transport
20
-80% -60% -40% -20% 0% 20% 40%
0
2009 (IV) 2010 (I)
-20

-40 Food, tobacco, and refined mineral product sectors


proved to be the most resilient in 2009 (it is though
-60
necessary to mention that these sectors are
-80 generally considered less susceptible to business
2008 2009 2010 cycle fluctuations). Production of paper and related
Industrial confidence indicator products also experienced a less severe decline in
Assessment of stocks
Production expectations over the next month their production volumes. The computer and optical
Assessment of total orders equipment sector, the one higher-value-added
sector with a more or less significant share in
Lithuania’s total industrial production volumes, was
Even considering the drastic contraction rates in
able to grow last year mostly due to its successful
2009 and thus the very low comparative base, the
previous penetrations into the niche export markets.
rebound of the transport sector is one of the most
significant. The sector appeared to be surprisingly
Developments in the machinery repairs sector have
resilient in spite of some adverse factors, including
been highly uneven as companies might have
cost increases and the elimination of preferential
preferred to fix rather than buy new equipment in
tax rates for biofuel starting in the beginning of
certain periods; meanwhile, transport equipment,
2010. This improvement is primarily driven by the
furniture, textile, and wood and building material
increase in cross-border, rather than domestic,
production fell severely during the first half of 2009.
services.
Although generally less susceptible to business
cycle fluctuations, manufacturing of chemicals and
Domestic demand-oriented sectors might
chemical products plunged in the first half of 2009
experience the first glimpses of light at the end of
due to the fall in prices of pesticides and increase in
the tunnel starting in the 2nd quarter as well. As
gas prices in world markets. In terms of value
mentioned above, confidence indicators portray
added, it appears that medium- value- added
steadily improving expectations, while retail sales at
sectors, which occupy the larger share of
the end of the 1st quarter also showed better
Lithuanian industrial production, have been overall
results.
more resilient.

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The Lithuanian Economy

Economic Research Department, Swedbank


01 • 2010 05 18

Exports of goods, year-on-year only marginally last year, while they fell by 11.6%
during the 1st quarter. Exports of food also declined
Transport
on a yearly basis in the 1st quarter; however, the
Paper
Plastics
large share of the production of the sector (about
Wood
60% of the total) is consumed domestically.
Other
Mineral products The sectors that took the lead in export recovery at
Machinery the end of 2009 due to improvement in external
Furniture demand – for instance, wood, furniture, plastics,
Metal etc and rubber – are likely to continue performing well.
Textile The good news is that the majority of domestic
Food demand-oriented sectors, except building materials,
Chemical products are generally considered less susceptible to
Optical instruments business cycle fluctuations. Thus, food,
-20% 0% 20% 40% 60% 80% pharmaceuticals (about 55% consumed in
2010 (I) Lithuania), and also paper (about 58% sold in
Lithuania) are likely to be able to increase their
production this year. Building materials are unlikely
As industrial production starts to show the first signs
to rebound until the middle of 2011, while
of recovery, some sectors will be driving growth,
beverages (close to 80% of production sold in
and some may be experiencing difficulties for a
Lithuania) will also be experiencing difficulties for
somewhat longer time. Compared with the
some time to come.
contraction during the first three quarters of 2009,
production of paper, wood, textile, and food
The longer-term developments in Lithuania’s
appears to have rebounded the most. Metals have
industrial sector should be on a subtler and more
also shown improvement, although, after seemingly
complex level, and should be promoting a shift in
strong growth in the last quarter of 2009, production
industrial structure. Even though traditional
fell on a yearly basis again in the 1st quarter of
manufacturing industries like wood and metal
2010. Chemicals and chemical product growth had
processing will always play an important role in
already moved into positive territory in the second
Lithuania due to the available resources, growth in
half of 2009, while manufacturing of rubber and
the higher-value-added products will be required to
plastics products, after contracting during all of
generate sustainable growth - i.e., sophistication of
2009, registered a quite comfortable positive growth
the products, more effective use of capital, the
rate in the 1st quarter of 2010.
strengthening of horizontal links, and the creation of
new clusters within the Baltic region.
It is apparent that the increase in production
volumes in most sectors (for instance, plastics and
rubber, textile, wood, and, to some extent, metals, Ieva Vysniauskaite
was due to the recovery in external demand. For
some sectors, however, this is not so clear:
chemicals and chemical product exports improved

Swedbank
Economic Research Department Swedbank’s monthly newsletter, The Lithuanian Economy is published as a service to our
SE-105 34 Stockholm customers. We believe that we have used reliable sources and methods in the preparation
Phone +46-8-5859 1028 of the analyses reported in this publication. However, we cannot guarantee the accuracy or
ek.sekr@swedbank.com completeness of the report and cannot be held responsible for any errors or omissions in
www.swedbank.com the underlying material or its use. Readers are encouraged to base any (investment)
decisions on other material as well. Neither Swedbank nor its employees may be held
Legally responsible publisher
responsible for losses or damages, direct or indirect, owing to any errors or omissions in
Cecilia Hermansson, +46-88-5859 1588.
The Lithuanian Economy.
Lina Vrubliauskienė, +370 5 268 4275.
Ieva Vyšniauskaitė, +370 5 268 4156

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